DCIT, Jaipur V. PREEYA HOME STUDY P LTD., JHUNJHUNU

ITA 715/JPR/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48023 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-07-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 11-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K C MEENA
• Keywords: Commercial expediency
• Section: 143(3)

Judgement Text

1 ITA 715-10 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH B JAIPUR BEFORE SHRI R.K. GUPTA AND SHRI N.L. KALRA ITA NO. 715/JP/2010 ASSTT. YEAR : 2006-07. THE DCIT, CENTRAL CIRCLE-2, VS. M/S. PREEYA HOME STUDY P. LTD., JAIPUR. 1G-13, INDRA NAGAR, JHUNJHUNU. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.C. MEENA RESPONDENT BY : SHRI VINOD GUPTA ORDER DATE OF ORDER : 28/07/2011. PER R.K. GUPTA, J.M. THIS IS AN APPEAL BY DEPARTMENT AGAINST THE ORDER OF LD. CIT (A) RELATING TO ASSESSMENT YEAR 2006-07. 2. THE DEPARTMENT IS OBJECTING IN DELETING THE DISA LLOWANCE OF RS. 11,96,078/- OUT OF PAYMENT OF COMMISSION TO SENIOR EXECUTIVES/MEMBERS AND OF RS. 10,80,572/- TO OTHER MEMBERS WHICH WAS HELD TO BE EXCESSIVE AND UNREASON ABLE. THE DEPARTMENT IS ALSO OBJECTING IN DELETING THE DISALLOWANCE OF RS. 3,29, 550/- OF THE REMUNERATION PAID TO THE DIRECTORS OF THE COMPANY. 3. THE LD. D/R PLACED RELIANCE ON THE ORDER OF THE AO. 4. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE H AS PLACED RELIANCE ON THE ORDER OF LD. CIT (A). FURTHER HE HAS FILED BRIEF WRITTEN SU BMISSION ON WHICH RELIANCE IS PLACED. 2 5. IN RESPECT OF FIRST GROUND, THE BRIEF FACTS OF T HE CASE ARE THAT ASSESSEE COMPANY ENGAGED IN THE BUSINESS OF IMPARTING COMPUTER EDUCA TION THROUGH NET WORK MARKETING. THE RETURN OF INCOME WAS FILED DECLARING INCOME OF RS.20,77,790/-. DURING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT DURING THIS YEAR THE ASSESSEE HAS SHOWN TOTAL FEE RECEIPTS OF RS. 3.27 CRORES OR ODD AND NE T PROFIT HAS BEEN SHOWN AT RS. 21,74,815/-. THE AO FURTHER NOTICED THAT DURING TH IS YEAR THE ASSESSEE HAD DEBITED RS. 2,70,05,760/- TOWARDS COMMISSION. THE AO HAS OBSERV ED THAT THOUGH THE COMPANYS MAIN OBJECT IS IMPARTING COMPUTER EDUCATION TO ITS MEMBERS, THE MEMBERSHIP OF THE COMPANY IS SPREAD THROUGH THE SCHEME EARN WHILE YO U LEARN. THIS CONCEPT FOLLOWS NET WORK MARKETING, WHERE EVERY MEMBER TRIES TO INTRODU CE NEW MEMBERS. WHEN A NEW MEMBER JOINS THE COMPANY, A MAJOR PART OF THE FEES PAID BY IT IS DISTRIBUTED TO THE MEMBERS AT HIGHER STAGES AS PER VARIOUS SCHEMES. T HE COMPANYS MARKETING POLICY IS TO MAKE MORE AND MORE MEMBERS SO THAT THE MEMBERS AND THE COMPANY BOTH EARN ONLY ON ACCOUNT OF EXPANSION OF THE MEMBERSHIP. IN THE YE AR UNDER CONSIDERATION THE MEMBERSHIP FEE HAD BEEN FIXED AT RS. 7,800/- WHICH EXCLUDING SERVICE TAX AMOUNTED TO RS. 6171/-. OUT OF THE SAME, AN AMOUNT OF RS. 5202/ - IS DISTRIBUTED AS COMMISSION TO OTHER MEMBERS WHO ARE AT HIGHER STAGE OF MEMBERSHIP . THEREAFTER OTHER CLAUSES OF THE SCHEME HAVE BEEN DISCUSSED BY THE AO IN HIS ORDER W HICH IS ALSO REPRODUCED IN THE ORDER OF LD. CIT (A) AT PAGES 3 & 4. THE AO HAS NOTED TH AT DURING THE RELEVANT YEAR TOTAL OF RS. 5219 MEMBERS HAD ENROLLED, EACH PAYING RS. 6800/- A S FEE. TOTAL FEE RECEIVED AT RS. 3.27 CRORES OR ODD EXCLUDING SERVICE TAX BUT INCLUDING S MALL AMOUNT OF FEE RECEIVED AS EVENING CLASSES FEE. AGAINST THIS, THE COMPANY HAS DEBITED A TOTAL AMOUNT OF RS. 2.70 CRORES OR ODD TOWARDS COMMISSION. OUT OF THIS COMMISSION, RS. 1.24 CRORES OR ODD WAS SHOWN AS 3 PAYABLE IN THE BALANCE SHEET. TOTAL COMMISSION PAY ABLE INCLUDED RS. 44.02 LACS WHICH WAS SHOWN PAYABLE TO MEMBERS WHO HAD NOT FULFILLED THE MANDATORY REQUIREMENT OF INTRODUCING AT LEAST 2 MEMBERS. DURING THE YEAR UN DER CONSIDERATION THE COMPANY HAD 120 EXECUTIVES, 37 SENIOR EXECUTIVES, 17 SUPER SENI OR EXECUTIVES AND 1 SILVER STAR. THE COMPANY HAD PAID COMMISSIONS AMOUNTING TO RS.19,79, 330/-, RS.16,75,138/-, RS. 36,81,017/- AND RS. 6,38,369/- TOTALING TO RS. 79,7 3,854/- TO THESE EXECUTIVES. AFTER OBSERVING THE NATURE OF BUSINESS OF THE ASSESSEE AN D AFOREMENTIONED COMMISSION PAYMENT BY THE ASSESSEE THE AO WAS OF THE VIEW THAT THE COMMISSION PAID BY THE ASSESSEE WAS EXCESSIVE, UNREASONABLE FROM COMMERCI AL EXPEDIENCY POINT OF VIEW. THEREFORE, THE AO MADE THE IMPUGNED ADDITION I.E. R S. 11,96,078/- PAID TO THE EXECUTIVES AND SENIOR MEMBERS AND RS. 10,80,572/- PAID TO OTH ER MEMBERS AS PER HIS DETAILED DISCUSSION CONTAINED AT PAGES 8 & 9 OF THE ASSESSME NT ORDER. THE DETAILED OBSERVATIONS OF THE AO HAS ALSO BEEN TABULATED IN THE ORDER OF L D. CIT (A) AT PAGES 4 TO 6. 6. ASSESSEE CHALLENGED THE ACTION OF THE AO BEFORE LD. CIT (A). DETAILED WRITTEN SUBMISSIONS WERE FILED BEFORE LD. CIT (A) WHICH HAS BEEN TABULATED IN THE ORDER OF LD. CIT (A) AT PAGES AT PAGES 7 TO 11. RELIANCE WAS PL ACED ON VARIOUS CASE LAWS BY THE ASSESSEE. ACCORDINGLY IT WAS PLEADED THAT THE IMPU GNED ADDITION MADE BY AO WAS NOT JUSTIFIED. 7. AFTER CONSIDERING THE SUBMISSIONS, THE LD. CIT ( A) WAS SATISFIED WITH THE EXPLANATION FILED ON BEHALF OF THE ASSESSEE. IT WA S FURTHER NOTED THAT ON SIMILAR CIRCUMSTANCES THE AO HAS ACCEPTED THE PAYMENTS WHIL E COMPLETING THE ASSESSMENT UNDER SECTION 143(3) FOR ASSESSMENT YEAR 2005-06. ACCORD INGLY HE DELETED THE ADDITION MADE BY AO. 4 8. AFTER CONSIDERING THE ORDERS OF THE AO AND LD. C IT (A), WE FIND NO INFIRMITY IN THE FINDINGS OF LD. CIT (APPEALS) WHICH IN OUR CONS IDERED VIEW ARE FINDING OF FACT. THE FINDING OF LD. CIT (A) HAVE BEEN RECORDED IN PARA 5 .3 AT PAGES 12 AND 13 OF HIS ORDER ARE AS UNDER :- 5.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF TH E CASE AND SUBMISSIONS OF LD. A/R.ON PERUSAL OF THE RELEVANT M ATERIAL ON RECORD, I FIND SUBSTANCE IN THE CONTENTIONS/ARGUMENTS OF LD. AR RAISED IN SUPPORT OF THESE GROUNDS OF APPEAL. IT IS OBSERVED THAT THE AP PELLANT COMPANY IS E3NGAGEDINTHE BUSINESS OF IMPARTING OF COMPUTER EDU CATION TO ITS MEMBERS AND THAT THE MEMBERSHIP SCHEME OF THE COMPA NY IS BASED ON THE CONCEPT OF EARN WHILE YOU LEARN. FURTHER, IT IS SEEN THAT THE BUSINESS/ACTIVITIES OF THE COMPANY ARE BASED ON THE SYSTEM OF NET WORK MARKETING, WHEREBY EVERY MEMBER TRIES TO INTRODUCE NEW MEMBERS AND AS AN INCENTIVE GETS A CERTAIN AMOUNT OF COMMISSION, A S PER THE MARKETING POLICY OF THE APPELLANT COMPANY. THEREFORE, I FIND MERIT IN THE CONTENTION OF LD. AR THAT THE PAYMENT OF COMMISSION TO ITS MEM BERS WAS AN INTEGRAL PART OF THE BUSINESS CARRIED ON BY THE APPELLANT CO MPANY AND THAT THERE WAS A DIRECT NEXUS BETWEEN THE COMMISSION PAID AND THE GROWTH OF BUSINESS OF THE COMPANY. IN THIS REGARD, IT IS NOTI CED THAT THE SAID CONTENTION OF THE LD. AR IS SUPPORTED BY THE FACT THAT THE BUSINESS TURNOVER OF THE APPELLANT COMPANY HAS INCREASED TO RS.3,27,30,529/- IN THIS YEAR, AS COMPARED TO THE TURNOVER OF RS.87,17, 400/-IN THE LAST YEAR. FURTHER, IT IS OBSERVED THAT THERE IS NO DISPUTE RE GARDING THE FACT THAT THE COMPANY HAS PAID THE COMMISSION TO ITS MEMBERS AS P ER THE PRE- DETERMINED POLICY/SCHEME OF THE COMPANY LAND THAT T HE GENUINENESS OF THE COMMISSION PAYMENT IS NOT IN DOUBT. IT IS ALSO NOTI CED THAT THE COMMISSION PAYMENTS WERE MADE BY ACCOUNT PAYEE CHEQ UES AND THAT ALL THE DETAILS THEREOF, SUCH AS, THE NAMES OF THE RECI PIENTS, THEIR ADDRESSES, DATE AND AMOUNT OF PAYMENT, ETC. WERE PRODUCED BEFO RE THE AO AND THAT NO DEFECT WAS FOUND THEREIN. FURTHER, IT IS ALSO N OTICED THAT THERE IS NO 5 MATERIAL/EVIDENCE ON RECORD TO INDICATE THAT ANY C OMMISSION PAYMENT WAS INCORRECT OR FALSE OR HAD BEEN MADE FOR ANY PURPOSE S OTHER THAN THE BUSINESS PURPOSES. IN ADDITION, IT IS SEEN THAT THE SIMILAR COMMISSION PAYMENTS WERE MADE IN THE LAST YEAR, WHICH HAD BEE N ACCEPTED IN THE SCRUTINY ASSESSMENT ORDER PASSED U/S 143(3) FOR THE A.Y.2005-06. THEREFORE, FROM THE ABOVE FACTS, IT IS EVIDENT THA T THE GENUINENESS OF THE COMMISSION AND THE PAYMENTS THEREOF BY THE APPELLA NT COMPANY TO ITS MEMBERS IS NOT IN DOUBT/DISPUTE. HOWEVER, IT IS NOT ICED THAT THE LD. AO HAS DISALLOWED ONLY A PART OF THE CLAIMED COMMISSION PA YMENTS, IN THE GROUND THAT THE COMMISSION PAYMENT WAS EXCESSIVE AND UNREA SONABLE, FROM THE COMMERCIAL EXPEDIENCY POINT OF VIEW. BUT, I AM NOT ABLE TO AGREE WITH THE LD. AO IN THIS REGARD, BECAUSE THE COMMERCIAL EXPED IENCY IS TO BE JUDGED BY THE BUSINESSMAN (WHICH THE APPELLANT COMPANY IN THIS CASE0, WHO IS CONDUCTING THE BUSINESS, FROM HIS POINT OF VIEW AND , THEREFORE, HE IS THE BEST PERSON TO DECIDE AS TO WHAT EXPENDITURE (COMMI SSION PAYMENT IN THIS CASE) WOULD BE APPROPRIATE FOR CARRYING OUT OR FOR THE GROWTH OF HIS BUSINESS. THEREFORE, IN THIS RESPECT, I FIND MERIT IN THE CONTENTION OF THE LD. AR THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIEN CY, FOR DETERMINING WHETHER THE EXPENDITUR4E WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS, REASONABLENESS OF THE EXPE NDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AN D NOT OF THE REVENUE, WHICH IS SUPPORTED BY THE DECISION OF HONBLE SUPRE ME COURT IN THE CASE OF J.K. WOOLEN MANUFACTURERS V/S CIT (SUPRA) AND SE VERAL OTHER CASE LAWS, RELIED UPON BY LD. AR, ON THIS ISSUE. THEREFORE, CO NSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THIS CASE, IT IS HELD THAT TH E PART DISALLOWANCE MADE BY THE LD. AO, OUT OF THE CLAIMED COMMISSION PAYMEN TS, IS NOT SUSTAINABLE. ACCORDINGLY, THE AO IS DIRECTED TO DELETE THE IMPUG NED DISALLOWANCES OF RS.11,96,078/-AND OF RS.10,80,K572/-. CONSEQUENTLY GROUNDS NO. 4& 5 OF THE APPEAL ARE ALLOWED. 6 THE ABOVE FINDING COULD NOT BE CONTROVERTED NOR ANY MATERIAL BROUGHT ON RECORD TO ESTABLISH OTHERWISE. THE LD. CIT (A) HAS ALSO TAKE N PAST HISTORY INTO CONSIDERATION AND FOUND THAT IN SIMILAR CIRCUMSTANCES NO ADDITION WAS MADE BY THE AO IN EARLIER YEAR WHILE COMPLETING ASSESSMENT UNDER SECTION 143(3). IN VIE W OF THESE FACTS AND CIRCUMSTANCES, WE HOLD THAT LD. CIT (A) WAS JUSTIFIED IN DELETING THE IMPUGNED ADDITION MADE BY THE AO. ACCORDINGLY, WE CONFIRM THE ORDER OF LD. CIT (A). 9. THE REMAINING GROUND IS IN RESPECT OF DELETING T HE ADDITION OF RS. 3,29,550/- DISALLOWED ON ACCOUNT OF DIRECTORS REMUNERATION. 10. THE AO NOTED THAT ASSESSEE HAS PAID RS. 6,33,75 0/- AND RS. 3,80,250/- TO ITS DIRECTORS SHRI TEJPAL SINGH NUNIAAND SHRI SURENDRA SINGH NUNIA RESPECTIVELY. THE AO NOTED THAT THE REMUNERATION PAID TO THOSE DIRECTORS IN THE LAST YEAR AS ONLY RS. 1,50,000/- EACH AND HENCE THERE WAS A SUBSTANTIAL INCREASE IN THE REMUNERATION PAID TO THEM IN THIS YEAR. BY ATTRACTING THE PROVISIONS OF SECTION 40A( 2)(B), THE AO DISALLOWED 40% OF THE REMUNERATION PAID TO SHRI TEJPAL SINGH NUNIA AND 20 % OF THE REMUNERATION PAID TO SHRI SURENDRA SINGH NUNIA. IN THIS WAY TOTAL DISALLOWAN CE WAS MADE AT RS. 3,29,550/-. IT WAS EXPLAINED BEFORE LD. CIT (A) THAT TURNOVER OF THE A SSESSEE HAS BEEN INCREASED MANY FOLD IN COMPARISON TO EARLIER. THE TURNOVER OF THE COMPA NY DURING THE YEAR UNDER CONSIDERATION REACHED TO RS. 3,27,30,529/- WHEREAS IN THE EARLIER YEAR THE TURNOVER WAS RS. 81,17,400/-. IT WAS FURTHER SUBMITTED THAT THE PERCENTAGE OF SALARY IN EARLIER YEAR WAS 3.70% OF THE TOTAL TURNOVER WHEREAS IN THE YEAR UND ER CONSIDERATION IT IS ONLY 3.10%. THEREFORE, DISALLOWANCE MADE BY AO WAS NOT JUSTIFIE D. 11. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD, THE LD. CIT (A) FOUND THAT PROVISIONS OF SECTION 40A(2)(B) ARE NOT APPLICABLE AS NO COMPARABLE CASE 7 HAS BEEN BROUGHT ON RECORD BY THE AO. THE TURNOVER OF THE ASSESSEE HAS BEEN INCREASED MANY FOLD, THEREFORE, INCREASE IN SALARY WAS HELD A S JUSTIFIED. 12. AFTER CONSIDERING THE ORDERS OF THE AO AND LD. CIT (A), WE FIND NO INFIRMITY IN THE FINDING OF LD. CIT (A). THE LD. CIT (A) HAS NO TED THAT THE INCREASE IN SALARY WAS MADE BY PASSING A RESOLUTION ON 13.4.2005 IN THE EXTRA O RDINARY MEETING OF SHAREHOLDERS OF THE COMPANY. THE GENUINENESS OF PAYMENT OF REMUNER ATION TO THE DIRECTORS IS NOT IN DOUBT AND ALSO THERE WAS NOTHING ON RECORD TO INDIC ATE THAT EITHER THE REMUNERATION HAD NOT BEEN ACTUALLY PAID OR THAT THE SAME HAS BEEN PA ID FOR ANY PURPOSE OTHER THAN BUSINESS PURPOSE. THE FINDING OF LD. CIT (A) REMAINED UNCO NTROVERTED. THEREFORE, WE ARE OF THE VIEW THAT LD. CIT (A) WAS JUSTIFIED IN DELETING THE ABOVE DISALLOWANCE ALSO. 13. IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISM ISSED. 14. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 28 .7.2011. SD/- SD/- ( N.L. KALRA ) ( R.K. GUPTA ) ACCOUNTANT MEMBER JUDICIAL MEMBER JAIPUR, D/- COPY FORWARDED TO :- THE DCIT, CC-2, JAIPUR. M/S. PREEYA HOME STUDY P. LTD., JHUNJHUNU. THE CIT (A) THE CIT THE D/R GUARD FILE (ITA NO. 715/JP/2010) BY ORDER, AR ITAT JAIPUR. 8